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High seas is the new market normal

REUTERS/Yuri Gripas
Sheila Bair was one of a handful of national fiscal leaders who stared into the abyss of catastrophic subprime mortgage failures but was tasked with finding the solution.

The changing season signals new beginnings, warmer temperatures and for me, market stabilization. The subprime mortgage crisis feels like forever ago and yesterday at the same time. As we head into a new season of home construction, I can’t help but wonder: Have we weathered the fiscal storm only to be invited back to the same troubled waters of short-term gains and easy to obtain, unstable mortgages?

Matthew Nowakowski

The answers to those questions are complex and may be best left to someone that’s been in the belly of the beast. As Chairwoman of the Federal Deposit Insurance Corporation (FDIC) from 2006 to 2011, Sheila Bair was one of a handful of national fiscal leaders who stared into the abyss of catastrophic subprime mortgage failures but was tasked with finding the solution. During the crisis, she deftly navigated the politics of Beltway negotiations while asserting the interests of taxpayers, specifically depositors and homeowners.

Now, Bair will discuss the ethical decisionmaking she encountered during her tenure during the Great Recession as part of the Saint Mary’s University’s Hendrickson Institute for Ethical Leadership Forum on April 8 at 11:30 a.m.

Faced with a crisis in which millions of Americans could have defaulted as monthly payments on subprime mortgages ballooned out of control, the FDIC’s resolution process was key in enabling stronger banks to purchase struggling banks. Under Bair’s guidance, the FDIC offered credit support to buyers against future losses from troubled loans assumed in the purchase.

Insure bad debt in the name of market stability?

Herein lies the key ethical dilemma for dialogue: Should we, as taxpayers, empower government agencies to insure bad debt in the name of market stability? Is this strategy sustainable in the long-term, or are we better off enacting even stronger legislation now that further restricts the proliferation of high-risk mortgage instruments to the public?

No one seeks to deny or destroy the dream of home ownership to hard-working individuals. Bair adamantly supported stronger regulation and higher capital thresholds for banks, specifically to protect the interests of homeowners. Industry insiders, free-market traders and colleagues at other governmental agencies coolly met her emphasis on market discipline.

But the reality is if we do not allow for market stabilization of even the largest banks, we run the risk of rebuilding the same overleveraged, default-ridden instruments and institutions that led us to the brink.

Ethical challenge requires attention

The delicate balance of risk-protection for depositors while stimulating investor confidence and ultimately investment return is precisely an ethical challenge that requires our attention and conversation today. Bair’s talk, titled “Main Street vs. Wall Street and the New Financial Paradigm,” will bring her invaluable perspective gained from the ethical decision making she demonstrated while brokering bailout deals, creating cross-departmental fiscal legislation (Dodd-Frank Reform Act of 2010), and insuring risky debt to bolster liquidity in the market.

I personally believe now is the time for this discussion, while the economy is in recovery and we are able to breathe a bit easier. Unemployment has begun to drop, the macro-economy has begun to recover, and many of us yearn for fiscal stability. Let’s all hope that these homes that are about to break ground will be built on a strong fiscal as well as structural foundation.

Matthew Nowakowski, MBA, Ed.D,  is dean of the Graduate School of Business and Technology at Saint Mary’s University of Minnesota.

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